ECONOMIC GROWTH AND INCOME INEQUALITY IN DEVELOPING ECONOMIES: Theory and Evidence

ECONOMIC GROWTH AND INCOME INEQUALITY IN DEVELOPING ECONOMIES: Theory and Evidence

Abstract

This study empirically analyses the impact of inequality on economic growth using a sample of sixty five developing economies. The results show that inequality causes a negative effect on economic growth. However, this negative effect is substantially influenced by the domestic context in terms of the degree of inequality and the stage of economic development. Alower degree of inequality increases economic growth while a higher degree of inequality decreases economic growth. Moreover, inequality affects economic growth negatively only in low-income developing countries while this effect turns out to be positive in high-income countries. These results are shown to be robust to different econometric techniques, alternative specifications, inclusion of additional control variables, exclusion of outliers andsub-samples.JEL Classification: C23, D31, O40.

The Applied Economics Research Centre (AERC), University of Karachi, was established in 1973. The major functions of the Centre are policy oriented Core/academic Research , Contract Research for Clients, and post-graduate teaching and providing advisory services to the government.